Any QE change will affect key sectors

Telcos, utilities, infrastructure and other heavy borrowers stand to suffer if the US Federal Reserve winds back its economic stimulus measures early.

These sectors are most vulnerable, strategists warn, after minutes from the central bank’s January meeting showed many Fed officials are worried about the risks and cost of an open-ended asset purchasing program totalling $US85 billion a month.

A growing belief that the Fed could halt or slow quantitative easing (QE) triggered widespread selling on the S&P 500, which closed 1.24 per cent lower on Wednesday for its biggest single loss since November. US 10-year Treasury yields shed 0.94 per cent before retrieving some losses on Thursday.

Australian shares followed the lead from the US, falling 2.33 per cent to 4980.1 for their largest single- day loss in 10 months.

“The S&P had one of its worst days in months on the fear that perhaps the Fed has grown a bit nervous; maybe they’ll at least take their foot off the accelerator sooner than expected," he told The Australian Financial Review.

“I do think it makes markets nervous because investors become very comfortable and accustomed to easy monetary policy."

Colonial First State Global Asset Management’s London-based head of global equities, Habib Subjally, said that, because the Fed wouldn’t suspend QE unless it was confident sentiment was sufficiently robust, the benefit of a stronger world economy would help counter the impact of a withdrawal.

“The winners will be corporates sitting on a lot of cash like banks, insurers or other savings institutions."

Colonial head of investment markets research Stephen Halmarick said he had expected stimulus to end with Fed chairman Ben Bernanke’s term in January 2014 and, as such, an early finish would only mean a slight lead on that timetable.

“There’s an increasing risk QE [quantitative easing] will trail off from the third quarter to $US75 billion or $US65 billion," he said.

“But that decision will depend on how the economy and market behaves, given the [pending] debt ceiling and spending cuts."

The US has delayed negotiation around the onset of a $US600 billion package of spending cuts and tax rises due to take effect from January, until next month.

This so-called “fiscal cliff" would have sent the US back into recession and, while taxes were raised for the wealthy in a partial bid to offset its impact, politicians still need to deal with impending spending cuts.

America is also facing a breach of its debt ceiling if it does not negotiate a solution by May.

Despite these challenges, Mr Halmarick noted that bond markets had “barely moved" in reaction to suggestions of an early stimulus wind-down. “To have significant weakness in equities, bond yields would have to move markedly higher," he said.

From a bond market perspective, AMP head of macro markets Simon Warner said a model used by the manager indicated the withdrawal of stimulus would be likely to cause 10-year Treasury yields to rise by 50 to 75 basis points.

This discounts the impact of cyclical factors such as economic health on bond markets.

Mr Warner echoed the sentiment that the end of stimulus would be a positive signal on the economic outlook.

“Its removal should not have a disproportionate impact on the economy and market," he said.

“It might cause a flattening of the equity bull run but not one meaningful enough to turn the cycle. And will it cause a popping of the bond [price] bubble? Probably not."

Mr Koesterich characterised the US recovery as “very uneven, two steps forward one step back".

“The economic data in the US is better but it is mixed and it’s hard to argue that we’ve seen a significant change in the economic environment.

“What we’ve seen is this slow, gradual, grudging recovery."

The central bank had linked the duration of its third round of stimulus to a “substantial improvement" in the job market when it announced the program last September.

It indicated it would keep interest rates near zero until unemployment fell to 6.5 per cent so long as inflation did not threaten to break above 2.5 per cent.

Yet the Fed minutes showed that several board members stated an evaluation “of the efficacy, costs and risks of asset purchases might well lead the committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labour market had occurred".

Unemployment in the US was at 7.9 per cent in January.

Mr Halmarick suggested that, while stimulus might be wound back early, interest rates were still likely to stay near zero until around 2015.

By contrast, the governor of the Bank of England had called for more quantitative easing at its February meeting.

Investors are also speculating that the next Bank of Japan chief will also boost monetary easing.